City transfer tax may expand to cover incomplete real estate deals

The city's real estate transfer tax is a proven cash cow, but the Daley administration -- ever on the lookout for ways to generate revenue -- is considering ways to make Bossy produce more milk.

Revenue Department officials want to increase the number of people who pay the tax and to require others to come up with cash more quickly. The under-the-radar action comes as all Chicago property purchasers brace for a 40 percent increase in the transfer tax the City Council recently approved as part of a Chicago Transit Authority rescue package.

"Remember what I said about Bea Reyna-Hickey," said Ald. Bernard Stone (50th), invoking the name of the city's revenue director with whom he has clashed. "When there is a corpse lying in a casket she'll shake it to see if any change falls out of its pocket."

Reyna-Hickey said her department merely seeks to collect what the city rightfully has coming.

Under one proposal now in draft form, City Hall would require the transfer tax to be paid even when the buyer forfeits the down payment, which sometimes happens when a buyer backs out of a deal. Under a second proposal, the requirement to pony up would be triggered immediately when there is an installment agreement--a contract in which the buyer pays the seller over a period of months but does not receive title to the property until the last payment is made.

The proposed rules, which would not need City Council approval, follow what critics contend is a creative mandate imposed by the city a few years ago to require transfer tax payments in divorce cases when one member of the couple winds up with sole ownership of the home.

The transfer tax, which rises April 1 from $7.50 to $10.50 for every $1,000 of sales price, is paid by property buyers. It generated $206.8 million last year. The new revenue is earmarked to help cover CTA employee pension and health-care costs.

Michael Cornicelli, executive director of the Building Owners and Managers Association of Chicago, termed both of the new proposals "harsh." He said there is no transaction if, in the first case, the buyer forfeits the down payment and doesn't close. In the second, transfer of ownership in an installment agreement could be derailed, he said.

"A buyer could just change his mind. His business needs could change and that warehouse he contracted to buy is no longer large enough. You could have a divorce situation in a residential transaction," Cornicelli said.

In such cases buyers walk away giving up what they have paid and never own the property, he said.

The city's legal position is that whenever a purchase contract is signed, the buyer immediately receives a "beneficial interest" in the property, and that warrants taxation. Most buyers are spared paying immediately but pay when the deed is recorded, as "an administrative convenience," according to Revenue Department documents.

Reyna-Hickey said the provision to collect when down payments are forfeited could be changed, though she did not say why it was included in a tentative rule that also deals with other transfer tax matters.

"The intent is not to collect the tax unless the transaction has happened and closed," she said. "The language may need to be tweaked ... It's a draft."

But Reyna-Hickey defended the proposed upfront payment in the case of installment sales.

"We can't wait for 50 years for the tax to be paid," said Reyna-Hickey, citing an extreme example. And "think of the logistics of collecting the transfer tax one month at a time."

The department's final version may provide for a prorated refund if a buyer terminates a deal midstream, she said.

Reyna-Hickey also defended her department's November 2005 ruling on payment of the transfer tax in divorce cases.

"One party is purchasing the property from the other party," she said. "Therefore the law applies."

The spouse who gets the home is assessed half of the full tax, $5.25 per $1,000 of market value as of April 1, she said.

The requirement always has existed, but some people were not paying and "we needed to clarify it further," she said.

But a wide swath of the legal community apparently remains unaware.

Kimberly Anderson, a divorce attorney and chair of the Chicago Bar Association's Domestic Relations Committee, said she believed the tax is not triggered by divorce. Anderson routinely checks a box on a form indicating a tax exempt transaction when she files deeds for clients at the Cook County recorder's office.

"My clients have never had to pay that," Anderson said.

David Grund, another Chicago divorce attorney, said he only recently became aware of the tax requirement.

"In the past those transactions were exempt as are most transactions between spouses," he said.

David Levy, managing partner of the Berger/Schatz law firm, said his clients routinely pay the tax, but he agreed with Grund that it is unfair.

The divorcing couple "paid it when they bought," Levy said. "They pay it [again] to transfer between themselves ... It's not a sale. It's a division of assets."